DEFINITION
The Maximum Loss limit stipulates that your trading account equity should not fall below 94% of the initial account balance at any point during the account duration. In other words, for a Normal risk account, you are not allowed to incur losses exceeding 6% of your initial balance.
Note: The percentage of trading rule can be adjusted depending on the package you purchase from WeMasterTrade, and the terms are always indicated at the time of purchase.
Max Loss Rule Simplified Explanation:
This rule can also be called “account stop-loss”. The equity of the trading account must not, at any moment during the account duration, decline below 94% of the initial account balance. This is a sum of both closed and open positions (account equity, not balance). The logic of the calculation is the same as with the Maximum Daily Loss; the only difference is that your previous profit will be accumulative to your total loss. In detail, if you get funds of $50,000 your max total loss is $3,000. if you have the previous profit of $2,000 then it will be added to your total max permitted loss and it will be $5,000. In other words, you are allowed to lose $5,000 instead of $3,000.
For example, if you receive a virtual trading account with an initial balance of $50,000, the max loss rule is set at 6% of the initial balance. This means that your account cannot go below 94% of the initial balance - it is $47,000 in this example. Let's explore two cases to illustrate:
Case 1: Current Equity at $49,000
You get $50,000.
Your current equity is $49,000.
Account equity to close is $47,000.
If your losses exceed $2,000 and bring your equity to $47,000 or lower, your account will be closed for protection.
Case 2: Current Equity at $51,000
You get $50,000.
Your current equity is $51,000.
Account equity to close is $47,000.
Since having a $1,000 profit, this adds to your total loss limit. If your losses now surpass $4,000 from your $51,000 equity, bringing it to $47,000 or lower, your account will be closed.
In summary:
The Max Loss Rule acts as a safety measure, ensuring that your account is protected from significant losses, regardless of your profits. If your total losses reach or fall below 94% of the initial balance, your orders are closed immediately to avoid additional risks due to market fluctuations, and your account will be closed. This rule aims to find a balance between maximizing trading opportunities and managing potential downsides.
HOW IS IT CALCULATED?
Current Max Loss = total current closed positions of this day + the result of open positions.
In your trading dashboard, this can be found under Risk Management with the title Max Permitted Loss and the Remaining under it. The number under Max Permit Loss represents the actual maximum max loss amount that you are allowed to lose on the trading day. The Remaining represents the remaining amount that you can lose on trading day.
WHAT HAPPENS IF I BREAK THE MAX LOSS RULE?
The account will be automatically liquidated for the remainder of the trading day until the market is closed on the trading day if the Max Loss was reached or surpassed for that trading day. You CAN NOT resume trading since it is a rule violation. You need to buy a new package to start again.
A market order is sent to close any open positions by the auto liquidation mechanism when a Loss Limit threshold is reached. This can mean that the trader's P&L ends up over the Loss Limit threshold, which would mean that the Real Loss is more than the Max Loss Limit, depending on where the market was fluctuating at the time. If the trader's Net P&L does, in fact, "hit and exceed" the Max Loss Limit, then the auto liquidation, even with the ending P&L, is unquestionably the result of that liquidation.